1. Field of the Invention
The present invention relates to systems and methods for providing compensation to loan professionals and, more specifically, to providing a compensation program associated with modifiable mortgages which provides incentives to encourage a sales force to promote and originate modifiable mortgages.
2. Description of the Related Art
A lending institution, such as a bank, provides a loan to a debtor in return for periodic time payments at a set rate of interest. The time payments are due at predetermined payment intervals, typically every month, during the period or the term of the loan. The term is sometimes defined by the number of time payments. Part of each time payment made by the debtor is generally allocated to paying interest on the loan, and the remainder of the payment is allocated to reducing the amount owed, known as the principal balance of the loan, and any escrow deposits. Interest to be collected on the loan is often front loaded. This means that the portion of a payment, made by a debtor, which is allocated to interest will decrease over the term of the loan, while at the same time the portion of the payment applied to the principal will increase. The reduction in the principal balance by the time payments is known as amortization. Known methods of calculating interest rates and amortization payments are disclosed in “The Mathematics of Investing: A Complete Reference” by Michael Thomsett, pp. 23-40.
Financial loans (such as mortgages) may be classified as fixed-rate or variable-rate. In a fixed-rate loan, a prevailing interest rate at the time the loan is made determines the rate of interest for the entire term of the loan. In a variable-rate loan, a prevailing interest rate at the time the loan is made determines the initial rate of interest. However, at set dates the interest rate of a variable-rate loan is adjusted in accordance with a time-varying interest-rate index, such as the rate of interest payable on Treasury Bills.
Interest-rate indices typically fluctuate several times a year, and may fluctuate by substantial amounts during the term of a loan. Such changes in interest rates are beyond the variable-rate debtor's control, and may be to his or her advantage or detriment depending on whether the interest rate on the adjustment date is higher or lower than the mortgage's initial interest rate.
A mortgage servicer is an entity who is paid a fee to collect the payments from the mortgagor (borrower) and pay them to the mortgagee (lender). The fee collected is typically called a servicing income, servicing revenue, or servicing fee. There may be other terms for this fee. Mortgage servicing companies collect servicing fees as compensation for the collection and processing of mortgage payments.
A debtor having a fixed-rate loan may find that after receiving a loan at a fixed rate of interest, interest rates decrease substantially below the fixed interest rate associated with his or her loan. Naturally, the debtor prefers a loan with a low rate of interest so that the time payment amount will be as low as possible. Unfortunately, a drawback of a fixed-rate loan is that the debtor cannot automatically take advantage of decreases in interest rates. On the other hand, the fixed-rate debtor is not adversely affected by increases in interest rates which would negatively impact a variable-rate debtor.
To lower the mortgage payment in light of a decrease in interest rates, the mortgagor must refinance his or her loan. Refinancing a loan consists at least of the following steps: re-applying for the loan, re-qualifying for the loan, and signing a new loan agreement at the lower rate of interest. Refinancing of a loan involves a number of mandatory fees, such as fees paid to the lending institution, attorney's fees, and title searcher's fees. Therefore, refinancing is not cost effective to the debtor unless interest rates have decreased enough that savings from lower mortgage payments will offset the initial monetary expenditure of refinancing the mortgage. Mortgage servicing companies are adversely affected when mortgagors refinance their mortgages in order to take advantage of interest rate drops, because refinancing of a mortgage pays the mortgage in full thereby eliminating future earned interest on the mortgage and the accompanying servicing fee revenue.
In recent years par plus pricing has become very popular for refinancing mortgages. Par plus pricing is where a lender, in exchange for a higher rate of interest, provides a credit to the borrower which can be used to pay for the borrower's closing costs associated with refinancing. In essence, par plus pricing allows borrowers to lower the interest rates on their mortgages, through refinancing, without having to pay the associated fees at closing. This allows the mortgagor to lower his or her interest rate even if a small interest rate percentage drop would not have offset the monetary cost of traditional refinancing. Loan officers refinancing their current customers using par plus pricing are paid a commission on each refinance. A side effect of par plus pricing has been unusually high prepayment speeds on mortgages. High prepayment speeds negatively affect mortgage servicers and mortgage investors by lowering both the interest collected over time and the revenue generated through the mortgage servicing fee.
U.S. Pat. No. 5,878,404 is directed to a system and method for managing the amortization of a loan which automatically resets the rate of interest stored in memory in response to the debtor's election, yet holds the rate of interest fixed in the absence of such an election. In this patent application, a mortgage which can have its interest rate lowered without refinancing, as disclosed in U.S. Pat. No. 5,878,404, will be called a modifiable mortgage. The use of modifiable mortgages increases the customer retention rates for mortgage servicers and mortgage investors by eliminating the need to refinance mortgages in order to take advantage of lower interest rates. In essence, if a person had a mortgage whereby interest rates could be lowered without refinancing, such person may be less inclined to leave his or her current mortgage servicer.
Mortgage companies employ loan officers to originate mortgages. Compensation is paid to loan officers in the form of commissions for the origination of mortgages. Further, loan officers are typically paid a full commission when they refinance their current customers. When interest rates decline, par plus pricing provides loan officers the opportunity to earn a commission each time a customer refinances the same property. However, not all involved parties benefit from the refinancing of mortgages. Higher prepayment speeds adversely impact mortgage investors because their original investment is repaid earlier than expected. Servicing companies who collect payments on behalf of the investor also are adversely impacted because the servicing income generated is stopped when the loan is paid off.
A modifiable mortgage helps mortgage servicing companies retain their customers while at the same time helping to prevent mortgages from being paid off at faster than expected intervals. However, mortgage companies face a problem trying to get their salespeople to promote and originate (or sell) modifiable mortgages. The problem is that, under traditional compensation schemes, loan officers may earn less commission from modifiable mortgages than more conventional mortgage types. In particular, if a modifiable mortgage is offered to the borrower, a refinancing is less likely to occur and the loan officer does not receive additional compensation because a new refinanced loan is typically not originated. Loan officers therefore may not be incentivized to promote and sell modifiable mortgages because doing so may decrease the amount of income a loan officer could make when compared to selling other mortgage types, such as par plus pricing loans, which have a greater likelihood of being refinanced.
Accordingly, there is a need for compensation systems and methods which provide incentives to encourage a mortgage sales force to promote and sell modifiable mortgages which would benefit the mortgage sales force, mortgage servicers and mortgage investors.